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| NASDAQ’s
Reg SHO FAQs December 27, 2004
What is the new Regulation SHO? from Nasdaq
Trader website.
Regulation SHO is a new rule announced by the Securities and Exchange Commission (SEC) on July 28, 2004, making changes to the regulation of short sales. The new rule: Eases some current restrictions on effecting short sales, by suspending price test restrictions for a subset of actively-traded securities during a one-year Pilot Program, and Creates new restrictions, including: a uniform "locate" requirement for short sales in all equity securities, ando additional requirements on securities with significant settlement failures. When do I need to comply with Reg SHO? Most of the new provisions have a compliance date of Monday, January 3, 2005. The only exception is the Pilot program. The Pilot was rescheduled by the SEC in an order issued on November 29, 2004, and will now run from May 2, 2005, until April30, 2006. Is there going to be a uniform price test? No, the SEC has deferred adoption of a uniform price until completion of the Pilot. What is the Pilot? The Pilot is a one-year program that will exempt approximately 1,000 securities from any price test, both the bid test (for NASDAQ National Market ® securities) and the tick test (for exchange-listed securities). What is the SEC’s purpose behind this Pilot program? The SEC will review data collected during the Pilot to determine whether to: (1) eliminate a price test for some or all securities; (2) adopt a uniform bid test for all securities, which could include NASDAQ Small Cap Market SM and other over-the-counter (OTC) securities, not currently covered by a price test; or (3) maintain the current price tests. What stocks are in the Pilot program? The Pilot program will apply to a subset of Russell 3000 Index stocks. The 1,000 Pilot securities are comprised of 47.8% NASDAQ National Market securities, 50% NYSE-listed securities, and 2.2% Amex-listed securities. What about securities not in the Pilot? Securities not included in the Pilot will still be covered by the existing bid test (for NASDAQ National Market securities) or tick test (for exchange-listed securities). What is the Locate Rule? This new uniform rule, which supplants existing rules such as the NASD’s Affirmative Determination Rule (Rule 3370), requires a firm, prior to effecting a short sale in any equity security, to "locate" securities available for borrowing, and document what the firm has done to locate the securities. Market makers effecting short sales in connection with bona fide market making are exempt from this requirement. What are "Threshold Securities"? The SEC has adopted additional requirements for "threshold securities", which are securities with substantial settlement failures. A list of such threshold securities will be calculated and disseminated daily by the SRO on which the security is listed (or for which the SRO bears primary surveillance responsibility). NASDAQ is disseminating a list of threshold securities that covers NASDAQ National Market and SmallCap issues as well as OTCBB and other OTC securities. Where can I find this daily list of threshold securities? There are two NASDAQ sources for this information: •FTP site Text File: ftp://ftp.nasdaqtrader.com/symboldirectory/regsho/nasdaqthyyyymmdd. txt The web version of the List will be available on the Symbol Directory page at http://www.nasdaqtrader.com/asp/regsho.asp What are the additional requirements that apply to threshold securities? The "close-out" requirement requires a participant of a registered clearing agency to close out any fail to deliver position in a threshold security that has remained for 13 consecutive settlement days by purchasing securities of like kind and quantity. If the participant does not take action to close out the open fail to deliver position, the participant is prohibited from effecting further short sales in that security without first borrowing or arranging to borrow the security ("pre-borrow" requirement). Market makers are not exempt from this requirement. Where can I find the SEC’s Frequently Asked Questions on Reg SHO? On December 17, 2004, the Securities and Exchange Commission (SEC) published responses to frequently asked questions on Regulation SHO. The responses can be found on the SEC website.
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NASD Notice to Members 04-93 -
December 2004
Issues Relating to the SEC's Adoption of Regulation SHO Executive Summary On June 23, 2004, the Securities and Exchange Commission (SEC) adopted certain provisions of a new short sale regulation, designated Regulation SHO.1 Regulation SHO consists of new Rules 200 (definitional and order marking requirements), 202T (short sale price test pilot) and 203 (uniform locate and delivery requirements). Together with the Regulation SHO adopting release, the SEC issued an order establishing a one-year pilot suspending the provisions of SEC Rule 10a-1(a) and any short sale price test of any exchange or national securities association for short sales of certain securities for certain time periods (Pilot).2
NASD, in conjunction with The Nasdaq Stock Market, Inc. (NASDAQ), is issuing this Notice to Members to advise member firms and other interested parties of several recent actions and related guidance surrounding the adoption of Regulation SHO. First, on November 30, 2004, NASD filed for immediate effectiveness a proposed rule change to repeal NASD Rule 3110(b)(1),3 Rule 3210,4 Rule 3370(b)5 and Rule 11830,6 which are duplicative of or overlap with the uniform requirements of Regulation SHO. The repeal of these rules will be operative on January 3, 2005, the compliance date of Regulation SHO. Second, NASD and NASDAQ staff are providing information and guidance on several issues relating to Regulation SHO. Questions and answers have been provided relating to the Order Audit Trail System (OATS) rules, the application of Rule 3350 (the Short Sale Rule), the publication and dissemination of the “threshold list” required by Regulation SHO and excused withdrawal status for market makers that cannot comply with the Regulation SHO pre-borrow requirements. Finally, NASD is highlighting the recent questions and answers published by the SEC relating to Regulation SHO and is encouraging members to review this guidance prior to the January 3, 2005 Regulation SHO compliance date.
Questions regarding this Notice may be directed as follows: For questions regarding the repeal of NASD rules, contact the Office of General Counsel, Regulatory Policy and Oversight, NASD, at (202) 728-8071 or the Legal Section, Market Regulation, NASD, at (240) 386-5126; for questions regarding OATS Reporting, please contact the OATS Help Desk at (800) 321-NASD; for questions regarding Rule 3350 and market maker excused withdrawals, contact Office of General Counsel, The Nasdaq Stock Market, Inc., at (301) 978-8400; and for questions regarding Threshold List Securities, direct them to traderreports@nasdaq.com or Market Operations, NASD, at (866) 776-0800.
------------------------------ 1 See Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004).
2 See Exchange Act Release No. 50104 (July 28, 2004), 69 FR 48032 (August 6, 2004) (Pilot Order). See also Exchange Act Release No. 50747 (November 29, 2004), 69 FR 70480 (December 6, 2004) (Second Pilot Order).
3 Rule 3110(b)(1) requires that an associated person indicate on the order ticket whether an order is “long” or “short.”
4 Rule 3210 prohibits a member from selling a security for its own account or buying a security as a broker for a customer, if the member has a fail to deliver in that security that is 60 days old or older, or 90 days old or older for foreign securities.
5 Rule 3370(b) requires, among other things, that (1) no member accept a long sale order from a customer unless the member has possession of the security, the customer is long in his account, the member makes an affirmative determination that the customer owns the security and will deliver it on settlement date or that it is in good deliverable form on deposit with a member or other permissible entity; and (2) no member effect a “short” sale order for a customer, nonmember broker-dealer or proprietary account in any security unless the member makes an affirmative determination that the member will receive delivery of the security or that the member can borrow the security for delivery by settlement date, subject to certain exemptions.
6 Rule 11830 generally mandates delivery of a security within 10 days of the settlement date for short sales executed in NASDAQ securities that, on the trade date of the transaction, had a clearing short position equal to at least one-half of one percent of the issue’s total shares outstanding.
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| The Fox is Watching the Hen House (from RGM / FinancialWire article on Depository Trust & Clearing Corp article) |
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The largely unregulated DTC has become something of a defacto Czar presiding over the entire U.S. markets system, wielding more day-to-day influence and control than the SEC, the NASD and NASDAQ combined. And, as the SEC's June 4 ruling indicates, its monopoly over the electronic trading system appears even to be protected. How entrenched is the Depository Trust and Clearing Corp.? It's two preferred shareholders are the New York Stock Exchange and the NASD, a regulatory agency that also owns the NASDAQ (OTCBB: NDAQ) and the embattled American Stock Exchange! Regulators, regulate thyself? In an era when corporate governance is the primary interest for the SEC and state regulators, the DTCC is hardly a role model. Its 21 directors represent a virtual litany of conflict: They include Bradley Abelow, Managing Director, Goldman Sachs (NYSE: GS); Jonathan E. Beyman, Chief Information Officer, Lehman Brothers (NYSE: LEH); Frank J. Bisignano, Chief Administrative Officer and Senior Executive Vice President, Citigroup / Solomon Smith Barney's Corporate Investment Bank (NYSE: C); Michael C. Bodson, Managing Director, Morgan Stanley (NYSE: MWD); Gary Bullock, Global Head of Logistics, Infrastructure, UBS Investment Bank (NYSE: UBS); Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc.; Jill M. Considine,Chairman, President & Chief Executive Officer, The Depository Trust & Clearing Corporation (DTCC); Also, Paul F. Costello, President, Business Services Group, Wachovia Securities (NYSE: WB); John W. Cummings, Senior Vice President & Head of Global Technology & Services, Merrill Lynch & Co. (NYSE: MER); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC); Norman Eaker, General Partner, Edward Jones; George Hrabovsky, President, Alliance Global Investors Service; Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange; Thomas J. McCrossan, Executive Vice President, State Street Corporation (NYSE: STT); Eileen K. Murray, Managing Director, Credit Suisse First Boston (NYSE: CSR); James P. Palermo, Vice Chairman, Mellon Financial Corporation (NYSE: MEL); Thomas J. Perna, Senior Executive Vice President, Financial Companies Services Sector of The Bank of New York (NYSE: BNY); Ronald Purpora, Chief Executive Officer, Garban LLC; Douglas Shulman, President, Regulatory Services and Operations, NASD; and Thompson M. Swayne, Executive Vice President, JPMorgan Chase (NYSE: JPM). In their comments to the SEC regarding Regulation SHO in January, the 50 state regulators, through their association, the North American Association of Securities Administrators (NASAA) issued what many consider to be a strong warning that if the DTC is not dealt with in the final regulations, state regulators such as New York State Attorney General Eliot Spitzer may step to the plate.
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